Google’s Nest buying Dropcam

PALO ALTO, Calif.—First, Google got into home automation early this year with the $3.2 billion buy of smart thermostat and smoke alarm maker Nest Labs. Now, Nest has announced it plans to buy Dropcam, which makes video cameras that stream video to a user’s computer or cellphone. The $555 million buy gives Google an entrée into home security.

The deal should expand the companies’ share of the smart home market, an investor and market analyst tell Security Systems News.

However, how much Nest’s and Dropcam’s do-it-yourself connected home products will impact the security industry is less clear. And the companies' connection to Google—which keeps tabs on user’s online habits for marketing purposes—could raise customer concerns about privacy, even though Nest says no data would be shared without a customer’s permission.

“I feel that consumers will always be wary of any such product that collects so much data about the house and transmits that data wirelessly,” Navin Rajendra, an analyst at TechNavio, a London, England-based technology research and advisory company, told SSN. “So yes, although Nest did come out with a statement, I still feel privacy issues are a huge concern.”

Nest, based here, issued a news release June 20 saying it had “entered into an agreement to buy Dropcam for $555 million in cash, subject to adjustments. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals in the U.S.”

San Francisco-based Dropcam released the news in a blog post on the same date, saying the day was “one filled with excitement about the future of the connected home.”

Both Nest and Dropcam declined to comment further to SSN about the deal, when it might take place and what regulatory approvals are necessary.

The buy had been rumored for weeks. It means Google is adding a security component to its home automation offering, albeit a DIY one.

A recent report from Imperial Capital, a New York City-based full service investment bank, made a distinction between Dropcam’s customers and those of professional security companies.

The report, authored by Jeff Kessler, Imperial Capital’s managing director of institutional research, said: “Security companies generally are not participants in the do-it-yourself (DIY) market and do not target particular groups that may be interested in such products (e.g., college students, young professionals living in high-rises).”

But Dropcam’s offering is one that is ideal for many homeowners, according to Trae Vassallo, a partner at Kleiner Perkins Caufield & Byers, a Silicon Valley venture capital firm that is an investor in Dropcam.

“I found the product first as a consumer and fell in love with it,” Vassallo told SSN. She led Kleiner’s investment in Dropcam, which she said took place about a year ago. Vassallo declined to reveal the amount of the investment.

The company had invested in the smart home previously—about four years ago, in Nest, she said. “Nest was one of the earlier investments in this category and after Nest, I got so excited that I was looking for other things similar to what Nest was doing,” she explained.

Vassallo travels a lot for work and back in 2011 wanted to be able to peek in on her children while she was gone. A mechanical engineer by training, Vassallo said, “I started doing some research, thinking there’s got to be something out there that’s super easy and I was surprised at how little there was. What was out there was stuff that was from the traditional security industry. It was pretty heavyweight, it required servers and it was complex to set up and I don’t recall any of them having any real-time video capability.”

Then, she continued, “I came across Dropcam and I immediately bought one. I said, ‘This sounds perfect.’” She wanted to invest for Kleiner in Dropcam then, “but I was too late and missed out on the early round. But [the company] stayed on my radar and I was fortunately able to invest at a later point.”

She said she didn’t choose Dropcam for her home for security reasons. “There’s a lot more to cameras than just security,” Vassallo said. “Cameras are about connectedness, and I think that is a big shift. I did not get my camera as a nanny cam; I got it as a way for me to be closer to my family, and the fact that it also functions as a security camera for us is a bonus.”

How does Dropcam allow her to connect with her family?

“When I’m traveling, I just want to see that the kids are having a healthy, happy dinner, so I can see them and I can actually talk to them through the Dropcam,” Vassallo said. “I just press a little button and I can say, ‘Hey kids, Mommy is just checking in. I love you,’ and they’ll wave at me, and that’s it. Or I can be at work and I just want to make sure my oldest got home from school O.K.” She can use the camera for that purpose, too.

Dropcam also gives intelligent alerts, she said. “One of the things I love about it, when we’re traveling and we’re out of town, I can set up my devices so they send me an alert if there’s motion detected in my kitchen … [and] I can look at it and if something doesn’t look right I can take action,” Vassallo said.

Kessler said in his report that while “Dropcam could be a good entry product for those that do not understand or are not familiar with security products, it does not replace the security, home automation, and customer service capabilities which the likes of ADT or Control4 provide, and nor do we believe that it wants to.”

Vassallo agreed that Dropcam and professional security offerings could overlap. “I think it’s a spectrum,” she said, “and I think some people, even if they have solutions like Dropcam, are still going to want a solution like [professionally monitored security]. But solutions like this [Dropcam] give people the flexibility to have something that’s super lightweight or to sign up for something that’s a bit more serious. And we’ll have to see how that plays out.”

What can Nest and Dropcam do together that they couldn’t do alone?

It means more market share, Vassallo said. “Putting the two together is just an opportunity to take advantage of this huge market and accelerate everything now,” she said. “Each company was actually growing and doing super well on its own, but together it just accelerates their progress into the market.”

TechNavio’s Rajendra believes the buy is an indication that Google is interested in expanding its connected home reach. “It’s probably just the first step that Google is taking,” he said. “… We feel it won’t stop at Dropcam and the next stage could be connected appliances.” Google might acquire a smart appliance provider or possibly a smart appliance platform, he said.

In a blog entry, Nest sought to put to rest concerns about customer privacy because of its connection to Google.

Nest wrote: “Like Nest customer data, Dropcam will come under Nest’s privacy policy, which explains that data won’t be shared with anyone (including Google) without a customer’s permission. Nest has a paid-for business model and ads are not part of our strategy. In acquiring Dropcam, we’ll apply that same policy to Dropcam too.”

But Rajendra said hacking is a concern. “There’s a lot of information that’s being captured about your house,” he said, “and that’s something that’s quite concerning because it’s not just Google having all this data, but what’s more important is: Can anyone else access this data?”

However, Vassallo said that when it comes to hacking, “Google and Nest and Dropcam have the highest levels of security. We describe it as kind of consumer-banking-level security. … It’s an incredibly secure product from that standpoint.”

Nest said it likes Dropcam, founded in 2009, because the two “companies actually have a lot in common.”

Nest, which was founded in 2010, continued: “Dropcam built their company from the ground up with the goal of helping people stay connected to the things they care about. In a matter of a few short years, their team has managed to create products that change how people interact with their homes. So naturally, we couldn’t help but feel our companies would be a good match.”

Nest has run into problems with its smart smoke and carbon monoxide detectors, having to recall 440,000 of the devices in April because of a defect that made it possible for users to deactivate the alarm without meaning to do so. However, the company recently announced that the Nest Protect detector is back on the market—for the reduced price of $99 and minus an easy alarm-silencing feature. The feature was one of its biggest selling points, but it also was the cause of the recall.